Rickmers - why the ship has not arrived?

I wonder why Rickmers results announcement this quarter Q4, 2009 is so late.

To begin with, Rickmers is not running some complicated business. Just collect the lease fee every month right? At least that's what the CEO told us. If so, why need such a long time to know how much they earn?

And indeed it is long, even by its own record. If you compared the announcement record since 2008, this is the longest it takes, 45 days into a new quarter. Q2 last year, it takes only 36 days.

I can't help but suspect that something big is coming. I have no idea what it is. But if Rickmers delays the results announcement for it, it must have something to do with the DPU. Otherwise, Rickmers could always announce it separately.

For now, we are just waiting for the ship to arrive ... but what's on the ship is a question mark.


QuarterxxxxxxAnnounced on......Days into new quarter
Q2,2009xxxxxAug 14.................45
Q1,2009xxxxxApr 24..................24
Q4,2008xxxxxFeb 09.................40
Q3,2008xxxxxOct 31..................31
Q2,2008xxxxxAug 05.................36
Q1,2008xxxxxMay 05.................35

FSL - will there be storm ahead?

In my previous posting (http://mycroeconomics.blogspot.com/2009/07/fsl-whats-in-their-mind.html), I concluded that cutting the payout ratio will depress the unit price while do no good to the company.

Now let's look at what happen.

The general market sentiment since the announcement (21/Jul) has been on the uptrend. In fact, FSL tracks ST pretty well few days before the announcement, and even 4 days after that. Then on 25/Jul, we observed an expected drop upon XD. However, after that we see a clear decoupling, and it goes against the general trend.

This is interesting as it shows that the market need time to digest information, or in other words it is not 100% efficiency. Were the investors blinded by the immediate distribution?

Now the other shipping trust Rickmers is going to announce its results next week. If it can sustain its distribution, will it encourage investors to switch boat? If it cut further its distribution, will it damage further the sentiment on shipping trust? Will there be storm ahead?

Maersk, can Rickmers depend on it?

Further to my research earlier on Maersk's stand on their shipping line business, I try to find out a little more. And to my surprise, the same CEO Mr Andersen, who vowed not to invest in the shipping line anymore (see previous posting), is the same guy who is committed to make the shipping line 'top priority' in Maersk Group just 2 years ago (see article below).

The flipflop in a short 2 years time makes me more convince that the fate of the shipping line could be questionable. I urge Rickmers management to seriously look into this, so that it will not be caught in surprise.


Publication date: 11/6/2007

New Maersk chief makes shipping line ′top priority′

Improving returns in its struggling container shipping business is the number one priority for AP Møller-Maersk, the Danish group's first externally appointed chief executive has said on his first day in the job.

Nils Smedegaard Andersen, who came to Maersk from Carlsberg, the brewer, said a team was developing plans to increase returns at the Maersk Line container shipping business, which has been losing market share in spite of being the world's largest container line and has had to slash its rates. Mr Andersen was speaking only hours after taking office yesterday morning. However, he admitted Maersk Line faced complex problems.

"Usually when you have a problem that cannot be fixed in a few months, it's because it's a composite problem," he said. "What we have to do is really focus on holistic solutions."

Mr Andersen comes to Maersk after a management shake-up in June saw two senior executives - Tommy Thomsen and Knud Stubkjaer - pushed out and Jess Søderberg, chief executive, advance his retirement by two years. The changes were seen as a response by Michael Prem Rasmussen, chairman, to the problems facing Maersk Line since it botched the integration of computer systems with P&O Nedlloyd, the former world number three container line, which it took over in 2005.

Mr Andersen is only the fourth chief executive in Maersk's 103-year history. Before Mr Søderberg, Arnold Peter Møller ran the company from 1904 until 1965 and Maersk McKinney-Møller, his son, ran the company until Mr Søderberg's appointment in 1993. Mr McKinney-Møller, 94, still has a major influence over the company.

The container shipping business is not growing fast enough and not making enough money, according to Mr Andersen. "I think improving returns at this point is the first priority" followed by, mid-term, creating more growth in the business, he said. The container division would have to concentrate on finding the right routes to operate and the right pricing mechanisms, he added.

"We just have to get better and better all the time," he said. "There's no way you can take a quick decision and everything is good. This is about improving the way we work day-to-day." Losses at the container division depressed last year's earnings at the group, which produced pre-tax profits for 2006 of $6.05bn on $44.5bn revenue.

Source: msnbc.msn.com




http://www.freshplaza.com/news_detail.asp?id=10576

Maersk - Mixed signals for Rickmers

We were told by Rickmers CEO that Maersk needed the new ships badly, so I decided to do some research on this saviour.

From the article below, there are 2 mixed signals. One is that the group actually views the shipping line as a less profitable business and will not receive much investment in future. I think for a CEO to say this in public is a very strong statement. Will it lead to divestment? If so how will it impact Rickmers?

The good news is of course, if they do not want to buy new ships, the alternative is to rent. It will mean a good growth prospect potential for Rickmers.

For now, there is no clear answer.


No more ships for Maersk
The Maersk Group began on the back of its shipping fleet but now wants to invest in more profitable areas

Executive management in the A.P. Møller-Mærsk Group have indicated that the foundation stone of the company – its container shipping line – is not as profitable as other areas and will not receive as much investment in the future.

Maersk chief executive Nils Smedegaard Andersen told Berlingske Tidende newspaper that the heavy investment in Maersk Line over the last two decades meant that the company’s fleet simply can’t get any larger.

That, coupled with falling profits, means the Copenhagen-based group will focus its future investments in its oil and terminal activities.

‘We must spread our investments in the areas where we will get the best returns. Maersk Line has given bad yields in the last few years, and it is a complex area to make money in. Where investments are concerned, our main focus in the future will be directed towards oil and terminals, among others,’ said Andersen.

In recent years, the Maersk Group has invested up to 60 billion kroner in new ships and projects, but now wants better returns from areas of ‘great potential’.

‘Our oil business and terminals, together with other business interests, continue to grow significantly faster than the market,’ said Andersen.

The CEO confirmed that even when global economies stabilise again, the group does not intended to order new ships for Maersk Line, but rent vessels for varying periods to increase flexibility.

The Copenhagen Post



Edited June 22, 2009

FSL - What's in their mind?

Disclaimer: This is not an investment advice, purely my own opinion and I do own the stocks.

Ok, so FSL decides to cut the payout ratio to 50% in FY09 3Q. This is the second cut after the cut from 100% to 73% in FY09 1Q.

What we know here is the problem, the need to refinance, and we also know the outcome, the management decides to cut payout ratio. But we do not know why they make this decision!

First all let's see what are the options available and considerations:

By cutting the payout ratio, the management seems to have abandoned the option of raising fund from investors, unless they can get strong support from major shareholders or new stragic investors to inject funds.

However, at the same time, it is also hard to see how cutting the payout and prepayment can help in the other 2 options. FSL has an outstanding loan of $509 million. By cutting the ratio to 50% from 73% (FY09 2Q), it only saves about $4 million a quarter or $16 million a year, which is a mere 3%. It is clearly not a significant internal generated fund, and I can't see if any bankers would take this as good faith, and thus improve FSL credit rating. And even if for some reasons bankers like this, why didn't they do this earlier? How can the management suddenly wake up and say hey let's cut the ratio? The inconsistency is uncalled for in a relatively simple and predictable business model.

So in summary, I see this as a move with no clear direction.

FSL - 3Q FY09 DPU guidance US1.50 cents

FSL release 2Q FY09 results.

Key points:
- DPU US2.45 cents, which 74% of net cash from operation, no distribution reinvestment scheme this round
- No surprise from the business side
- Allocation of 50% free cash flow for distribution (last quarter was 75%), so 3Q FY09 guidance is US1.50 cents (down 38%)
- The cash retained will be used to repay debt.

As I highlighted in a previous posting, distribution from depreciation undermines the sustainablity of the trust in the long run, and has immediate impact on the unit price. However, reducing the payout would hit the unitholders pocket immediately, especially retirees dependent on the distribution.

http://mycroeconomics.blogspot.com/2009/07/depreciation-noncash-non-concern.html

It is interesting to see how the market reacts to this today.

Depreciation - Noncash, non-concern?

One of the key features of business trusts and normal stocks is that normal stocks can only distribute dividend from profit, whereas the trusts can do so from their revenue after deducting some necessary expenses and meeting compliance to loan covenants.

This has sometimes even been highlighted as an advantage as there is more cash to distribute. This prompts me to write something about it here.

One of the key components that makes up the delta between revenue and profit is depreciation. Depreciation is basically an allocation of upfront investment cost across its useful life. For example, we buy a ship for #30 million, and the useful life is 30 years, and further assume we use a linear depreciate method, the depreciation per year would be $1 million, ie $30 million divided by 30 years.

You may ask, since the money already paid upfront, why should I care about depreciation? After all it is just accounting profit and loss.

Well, remember the 30 years useful life? What happen after 30 years? Depreciation actually is a way that companies re-accumulate the capital needed to replace the asset when its life expires. If the company does not accumulate its earning, it would not be able to sustain it earning capability.

Now you may ask again, why should I care about what happen after 30 years? Well it matters. For instance, in discounted dividend flow valuation model, a finite dividend flow, and an infinite one will have very different values. In other words, what is projected to happen 30 years later will have impact on your trusts price today.

So make sure you understand what you get.

Overview of shipping trust & panel discussion

The event was one of the many conducted in the Asian Investment 2009 in Suntec. Below I try to capture some of my observations and important points, by no means a comprehensive one. Please do you own research before any investment decision.

It started with individual talks by OCBC analyst Meenal Kumar, FSL CFO Cheong Chee Tham, PST CEO ALvin Cheng Yu-Dong, Rickmers CEO Thomas Preben Hansen, and finally a panel discussion.

Meenal basically presented some basics of what a shipping trust is. I am not very sure of the objective of her presentations. But certainly she did not use the opportunity to sharpen investors' ability to understand the business model, she also did not even attempt to question any of the 3 companies directly. I hope one day we can see analyst really playing their part.

Next come FSL CFO, Cheong Chee Tham. Nothing surprise or exciting, he kept highlighting that FSL is more like a bank specialized in shipping than a shipping operator, as they only involve in bare boat leasing. And very importantly, they have a Chief Risk Officer to assess customer (counter party risk).

The next presenter was PST CEO Alvin Cheng. He started with history, saying that the company is the first listed shipping trust, in May 2006, and other aspects of the company. He appears cool and calm, really the trusted CEO type. However, he made 2 statements that gave me some uneasiness. First, he mentioned that the management fee is 4% of revenue, and therefore the management interest is aligned to that of unitholders to grow revenue. However, revenue can grow in many ways, and may not necessary benefit unitholders, eg right issue for acquisition. While I believe Alvin has no intention to sacrifice unitholders' benefit, this type of sweeping statement somehow made me feel my IQ is insulted. Second issue I have is on his illustration of PST asset value. First he talked about BV at $0.38, conservative value at $0.26, and then 'value in use' (which he said is a cashflow model) at $0.54, from which he concluded the stock is undervalue. My point is this, if this is a cashflow model, then the discount rate would be determined by the market, and reflected by stock price. You can't fix your own discount rate and claim market undervalue it. Other than the 2 points, I think Alvin gave a good presentation, especially on PST effort to continuosly deleveraging, and that the company loan has no asset covenant.

Finally, we have Rickmers CEO Thomas. First thing that caught my mind was the difference in management fee structure. For base fee, it has a fix $1.6 million plus a variable of 0.9% of the revenue. No incentive for acquisition or disposal. Sounds good to me. Again Thomas concurred that counter party risk is the major risk in shipping trust, and Rickmers managed that with choosing on large and financially sound customers. He mentioned that even under current financial turmoil, none of the 3 shipping trusts have been affected in terms of revenue as of now, and this is certainly a big plus compared to REITs. I think yes, but does it mean that the market is inefficient? When the market cannot adjust freely, a collapse could be inavoidable. Well I certainly hope no. On bare boat vs time charter, Thomas insisted that time charter, which means having their own crew on the ships make sense to Rickmers. He recognized an operating cost is incurred (which is small compared to revenue), but that gave him the assurance that the assets are well taken care of. Thomas further touched on the upcoming challenges including the pending $800 million capex requirement, and loan repayment next year, which Rickmers is still exploring many options. While no solution is given, he is certainly giving a lot of transparency, which I think is a good strategy.

Roger (SIAS), Meenal (OCBC research), Thomas (Rickmers), Chee Tham (FSL), Alvin Cheng (PST)

Okay, finally the panel discussion. The moderator Roger Tan from SIAS told the panel that, in order to encourage his wife to invest rather than to spend last year, he promised his wife to cover any loss if any. And expectedly they ended up in shipping trust. What could the panel offers? Well think longterm, look at the business model, look at the cashflow! Will globalization end? Will world trade end?

Next, a question from the audience thrown to Rickmers: What if there is no success in the $800 million capex financing or Maersk just don't want it? Thomas appears confident, firstly there is no way out for Maersk, secondly he knows that Maersk needs the ships badly to be compettive as the big new ships are more efficient. And even in the worst case when everything else fails, Rickmers last option would be not to take delivery. while there is contractual obligation, probably the impact is less than $800 million.

Second question addressed to PST, why not quoted stock in SGD? Well simple, the company asset and liability, revenue and expense, are all in USD. And many investors are USD based. Thomas made a good point when he suggested PST to keep it that way (Rickmers stock quoted in SGD), as he sees the industry will grow in Singapore, and differentiation in the different companies will offer investors choices that fit their needs best.

Finally, time's up, last question. Will the loan to acquire a ship fully paid by the time the first lease end. I think the question makes no sense. If the sum of the first lease is sufficient to fully pay off the loan, in other words the customers comitted a sum greater or equal to the price of a ship, why should the customers lease, they would just buy! To my surprise, PST says some of their ships met this criteria. Those are their IPO fleet, which understandably taking a lower loan. Rickmers and FSL just say said no.

Hope this summary helps for those did not attend.